How will the 2018 introduction of VAT in Gulf Cooperation Council (GCC) countries impact the food and beverage and hospitality industries?
Excerpts of these answers originally appeared in the September 2017 edition of Catering News Middle East.
As per the Unified VAT agreement signed by the GCC countries (Kingdom of Saudi Arabia, United Arab Emirates, Kingdom of Bahrain, Sultanate of Oman, State of Qatar, State of Kuwait) in the second quarter of 2017, all foodstuffs shall be subject to the basic VAT rate of 5%. Member States may apply a zero-rate on foodstuffs mentioned in a unified list of Goods yet to be approved by the Financial and Economic Cooperation Committee.
Additionally in the UAE, the Federal Tax Authority (FTA) announced a selective tax of 100% on tobacco and energy drinks, and 50% on carbonated beverages that will be applied in the fourth quarter of this year.
Related: Key recommendations for VAT implementation in the GCC.
The challenges
The short-term challenges in the food and beverage industry generally include the need for companies to adjust their accounting and reporting systems to include all functionalities of VAT. There's also increased costs of training to educate staff, lawyers to modify contracts, reprogramming the ERP systems, or even acquiring new ERP systems, will be levied on the companies. In the immediate future it is expected that all of these costs will be transferred to the consumers, and thus the price on food and beverages will increase, as this has traditionally been the case in other countries where VAT has been introduced.
Reduced demand for the products may impact food and beverage companies in the long term against forecast market capture. For instance, the 100% selective tax on tobacco and energy drinks and 50% on carbonated beverages will impact the market size for such companies, and it will be a challenge for them to sustain and earn high profits.
In the long term, it depends on how strict the competition already is today and what the margins are. If companies are already selling food and beverages at near marginal costs, it is in our view that all of the VAT costs will be passed onto the consumers.
Preparation
Change management is required in food and beverage-oriented organisations ahead of the 2018 introduction. As businesses are responsible for collecting correct taxes and paying them to the government at every step of supply, businesses should ensure they have well-trained staff with knowledge of VAT. This includes the ability to accurately determine and report on VAT. Also, to the largest extent possible, businesses should be automating the new process; both on the sales and purchase side. This may include hiring or recruiting VAT experts, deploying ERP software that can produce proper VAT reports and issuing invoices, etc.
Internal resources
The most important internal resources required are the right people who understand the VAT mechanics, and are aware of the pitfalls. All contracts need to be reviewed from a legal and tax perspective to ensure they take VAT into consideration. Furthermore, it is important that food, beverage and hospitality companies configure their IT systems correctly. IT systems are integral to the process because they need to be updated to handle the VAT - invoices will include line items for VAT. The invoices should be linked to VAT reports, which should be subsequently linked to the VAT returns. Preparation will entail a cost that companies need to be aware of. Impact assessments at organisational, operational and financial levels are also required by businesses to understand VAT and its commercial effect. Proper training of staff on the process requirements for VAT is necessary too.
Once the full roadmap is evaluated and designed, testing the VAT system, processes and controls during a 'live' phase (expected from 1 January 2018) is important to allow for the complete and accurate completion of the first VAT return and payment.
Common VAT misconceptions
Even though the introduction of VAT in GCC starts out at a low rate of 5% it should be remembered that it is equal to 5% of a company's total sales and purchases. In theory, even more, as it is per transaction. VAT - due to its nature as a turnover tax that is payable in every single transaction – is able to build up huge liabilities or loss of deduction if your tax determination and tax reporting processes are wrong.
VAT is supposed to be fiscally neutral. This is often misinterpreted by businesses as to mean VAT will not be a direct financial cost for them. Businesses work as the unpaid tax collectors for the state, if they don't do their job correctly ie. charge the VAT where and when they should, they end up paying that VAT to the state out of their own pocket.
Another misconception is that being prepared for VAT will be a quick process. VAT encompasses every part of a business, not just the tax department. Starting preparations as soon as possible is highly recommended.
Penalties for non-compliance are up to 500%. So getting it wrong and not paying VAT where you should, may have a large financial impact on your business. Likewise not deducting the VAT on your purchases is equally important.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
